What To Do When Your House is Underwater

Is your house underwater and you’re ready to move on? You may be asking, “How do I assess what I should do?”

You are in the unfortunate group of people who are still below the market. You still owe more money on your house than what you could make from the sale.

Underwater House: What to Do

1. Get a Market Evaluation

The first thing you need to do is get a true market appraisal. While I LOVE Zillow, it is NOT a resource in this case. In my experience, Zillow can be off up to $500 either way for rentals or $50,000 regarding the purchase price of a house. I used to think that at least the sold price was a great resource. Unfortunately, I have found and been informed that these aren’t great resources either.

Since this is a HUGE decision, I recommend reaching out to at least two realtors and getting a market evaluation. I would also ask them to provide a worksheet giving you the estimate of your final take home amount — so you can see all of the fees and expenses itemized, as well as your bottom line. This is important because, as I am sure you know, selling real estate isn’t cheap. I personally use 10% as the cost to sell. This is a quick and dirty number for doing math in your head. When you are making an important decision, you want firm numbers. Therefore, this worksheet from at least two realtors is a very important part of your decision.

If you decide to sell I recommend interviewing three realtors unless you already have one that you plan on using!

2. Run Your Numbers

The next thing you need to do is evaluate your options:

Your potential rental income vs. mortgage payment

Take home prices from selling the property vs. mortgage owed

I stress that you evaluate take home price because the sales price could be off greater than 10% after you calculate real estate agent fees, closing cost assistance, and other fees that you may be responsible for per your contract.

I always recommend you take the rental difference and divide it by the mortgage. For example, a $100 per month income would take 33.3 years to pay off a $40k loss if you had to bring funds to the table because your home is underwater. Therefore, while landlording is not for everyone and it certainly has its number moments, it can truly be beneficial in the long run.

Unless the area is unnaturally depressed due to over building or an economy swing that is not predicted to come back (think coal minds in PA), long term this could still be an amazing investment if you stick with it. Growing up, my family always had a rental. It wasn’t part of a plan, but due to my mom’s townhouse not making sense to sell at the time, they upgraded to their single family home when I was born and kept the townhouse as a rental.

Since I already dated myself, I will say that 26 years later when we did a 1031 we turned one house into three houses, all with at least 20% down. It also funded many things growing up.

If it is going to cost you money to sell your house, you will need to bring those funds to the closing table. If you can rent out your home instead and wait to sell — the numbers may work out in your favor.

Rent received per month minus all costs associated with your house (mortgage, taxes, insurance, maintenance) = net rent. Multiply that number by the number of months in your potential lease to get your potential rental income.

Compare this number against your funds to close number. You may be in a better position to sell if you rent it for just one year! Or who knows — you may like it and keep it as a rental!

Remember there are no guarantees, these numbers are just great educated guesses, so always hope for the best and prepare for the worst. It is important to take these numbers as an educated guess and be flexible. If you are told selling would break you even and it doesn’t — don’t forget about renting. If renting doesn’t work out you might want to reconsider selling. The key is to be flexible and open minded. Don’t forget that if it’s not renting, it’s probably over priced. Also, you don’t lose money until you actually sell the property.

I love my family, my country and real estate. My goal is to retire early through frugal living and real estate investment. I am making great strides and want to share the information I've learned through the process. Read More...